How would you describe the general state of equity capital markets in your jurisdiction, including notable recent activity and deals?
Domestic activity in the first half of 2018 was stronger than many would have expected. Though the United Kingdom and European Union agreed terms in March 2018 for a Brexit transition period extending until 31 December 2020, there is continued uncertainty which is expected to affect equity capital markets going forward. While the volume of initial public offerings (IPOs) on the London Stock Exchange (LSE) remained relatively steady (32, down from 35 in the first half of 2017), there was an overall 50% drop in the value of IPOs, attributed to a 91% drop in value of cross-border IPOs (domestic saw a 2% increase).
What recognised exchanges operate in your jurisdiction, and what are the pros and cons of listing in each?
The main market is the LSE's flagship market for larger, more established companies, comprising the premium listing and standard listing segments, but also operating the specialist fund and high-growth segments.
The eligibility requirements for admission to the premium segment are the most stringent in the United Kingdom – as are the ongoing obligations with respect to compliance and disclosure standards. Although more burdensome than other main market segments, a premium listing comes with potential for inclusion in the FTSE UK series of indices.
Alternative Investment Market (AIM)
AIM is the LSE’s international market for smaller and growing companies and its regulatory environment is designed accordingly.
For example, the entry criteria are tailored to growing companies and there are generally no minimum requirements as to trading record, public float and market capitalisation.
Professional securities market
The professional securities market is a market for debt and depositary receipts which are admitted to the Official List. It is an unregulated market.
Reforms and case law
Are any regulatory reforms envisaged or underway with regard to equity capital markets? Has there been any recent case law affecting the markets?
New prospectus regulation
From 21 July 2018 Section 86(1)(e) of the Financial Services and Markets Act 2000 was amended to increase the threshold for offers to the public that are exempt from the obligation to publish a prospectus from €100,000 to €8 million (total consideration of the offer in the European Union).
Financial Conduct Authority (FCA) IPO process reforms
These reforms came into force on 1 July 2018 and apply to IPOs on the Main Market.
The two key changes are:
- communications between issuer and research analysts – unconnected analysts are to be given access to the same information on an IPO candidate as connected analysts; and
- timing restrictions for disseminating research – either a prospectus or registration statement must be published before connected research can be published.
The reforms envisage two routes that an issuer can take:
- Joint access to and communication with connected and unconnected analysts, allowing connected research to be distributed from one day after publication of approved prospectus or registration statement; or
- Providing unconnected analysts with separate access to the issuer's management, in which case connected research cannot be distributed earlier than seven days after the publication of an approved prospectus or registration statement.
It is expected that there will be stronger interest in the second route.
Have there been any notable recent developments in financial technology (fintech) which affect equity capital markets in your jurisdiction?
The FCA's regulatory sandbox, launched in 2016, provides financial services companies – and fintech start-ups in particular – with a live but safe environment in which to test innovative products and services before launching them on the market.
What primary and secondary legislation governs the issue and trade of equity securities in your jurisdiction?
Generally, the issue and trade of equity securities are governed by:
- the Financial Services and Markets Act 2000;
- the Companies Act 2006;
- the Financial Conduct Authority (FCA) Rules (Listing Rules, Prospectus Rules, Disclosure and Transparency Rules); and
- the EU Market Abuse Regulation.
Alternative Investment Market (AIM) companies must comply with the provisions of the AIM Rules for Companies.
Which authorities regulate equity capital markets in your jurisdiction and what is the extent of their powers?
The regulatory authority for a listing on the LSE is the FCA, in its capacity as the UK listing authority.
The FCA makes decisions with respect to the eligibility for admission and regulates compliance with ongoing obligations. The FCA can impose unlimited fines, public censure, a temporary or permanent prohibition on an individual holding certain positions in an investment firm, a temporary prohibition on an individual acquiring or disposing of financial instruments and other penalties for engaging in market abuse.
The FCA can also require a company to publish specified information, including where the company has published false or misleading information or otherwise misled the public.
In the case of AIM-quoted companies, AIM Regulation (which is part of the London Stock Exchange) enforces the AIM Rules for Companies and the FCA enforces the Market Abuse Regulation.
What eligibility and disclosure requirements apply for primary listing of equity securities on recognised exchanges in your jurisdiction (eg, aggregate share value, free float requirements, trading record, working capital)?
All shares listed or admitted to trading must be capable of electronic settlement.
- Aggregate share value – at least £700,000.
- Working capital – must be sufficient for the group’s present requirements (at least 12 months from publication of the prospectus).
- Minimum free float requirement – a minimum of 25% of the class of shares to be listed must be in public hands in one or more European Economic Area (EEA) member states.
- Financial statements – the prospectus must include audited historical financial information for three financial years and any interim financial information published since the last audit.
- Operating history – an operating history of three years is generally required.
Alternative Investment Market (AIM)
- Aggregate share value – no minimum size or market capitalisation requirements, except for ‘investing companies’ (also know as ‘cash shells’), which must raise at least £6 million.
- Working capital – must be sufficient for the group's present requirements (12 months from the date of admission of the shares).
- Distribution – there is no minimum free float requirement (but nomad must consider liquidity).
- Financial statements – admission document must include audited accounts for the past three financial years (or fewer if the company has been in existence for less than three years).
- Operating history – there are no requirements to demonstrate any length of operating history.
Are there any exemptions from the listing requirements?
Exemptions from the requirement for audited historical financial information covering at least three years are sometimes granted.
A free float of less than 25% is sometimes permitted, with the Financial Conduct Authority (FCA) considering factors such as:
- shares held outside EEA states;
- the number and nature of the public shareholders; and
- whether the expected market value of the shares in public hands at admission will exceed £100 million.
Procedure and timeframe
What is the procedure and typical timeframe for listing?
What fees apply for an application to list equity securities?
A company seeking to list must pay both initial listing fees and annual fees to the LSE and the FCA, principally calculated according to market capitalisation. Additional shares listed subsequently will attract additional fees.
A company seeking a quotation on AIM must pay both initial admission fees and annual maintenance fees to the LSE. Initial fees are calculated according to market capitalisation. Additional shares listed subsequently will require additional payments.
Listing versus admission to trading
Is there a distinction between listing and admission to trading in your jurisdiction?
The FCA admits the shares of issuers seeking a premium or standard listing to the Official List, and the LSE admits the shares to trading on the main market.
Companies are admitted to trading on AIM but not to the Official List.
Are there any differences in the rules, restrictions and procedures for secondary listings of equity securities?
The LSE makes no distinction between primary and secondary listings or quotations in respect of admission to the main market or to AIM.
Are there any differences in the listing rules and procedures for foreign issuers?
All shares admitted to the main market or AIM must be capable of electronic settlement. A UK company's shares are eligible for direct participation in CREST – the UK electronic settlement system – whereas companies incorporated in other jurisdictions may need to establish a depository arrangement with a UK bank or other provider which will issue depository interests eligible for settlement within CREST.
A premium listing comes with the potential for inclusion in the FTSE UK series of indices. The FTSE publishes and applies its own eligibility criteria (which differ for UK and foreign companies).
There are no specific differences in requirements between domestic and foreign companies seeking AIM admission.
Under what circumstances can a company be delisted? What rules and procedures apply?
The FCA may cancel a listing under Listing Rule 5.2 where:
- the securities are no longer admitted to trading;
- the issuer no longer satisfies its continuing obligations (eg, with respect to free float); or
- the securities' listing has been suspended for more than six months.
The FCA will cancel an issuer's listing when it completes a reverse takeover (although the enlarged entity may then be admitted to listing).
To voluntarily delist, an issuer with a premium listing must send a circular to shareholders and obtain approval from its shareholders at a general meeting by special resolution.
An issuer with a standard listing must notify a regulatory information service, giving at least 20 business days’ notice of the intended cancellation. It is not required to obtain shareholder approval.
The LSE can cancel the company's AIM admission if:
- it ceases to have a nominated adviser and fails to appoint a replacement within one month;
- its securities have been suspended from trading for six months; or
- it has otherwise contravened the AIM rules.
A company's AIM admission will also be cancelled if it completes a reverse takeover.
An AIM company which seeks a voluntary cancellation must notify the LSE at least 20 business days before its preferred cancellation date and (unless the LSE agrees otherwise) obtain the consent of 75% of its shareholders.
Initial public offerings
What are the most common structures used for IPOs in your jurisdiction, and what are the advantages and disadvantages of each?
Principally because of the easier route to FTSE index inclusion, the use of a UK entity for listing purposes is more common.
Venue for listing
On the main market, companies use the premium segment far more often than the standard segment or either of the other segments. An initial public offering (IPO) on the Alternative Investment Market (AIM) is more common for smaller or growing companies. On a sliding scale from AIM admission to a premium listing, the registration procedures are more detailed and time-consuming, the disclosure documents are more detailed and formalistic and follow-on duties can be more complex. However, these points can be outweighed by higher valuations and liquidity and the reputational prestige of a premium listing.
Structure of offering
Offerings to institutional investors only are more common than offerings which also include a retail element, which is partly the result of the perceived additional liability exposure that comes with retail offerings. Offerings are usually extended into the United States, but only to qualified institutional buyers.
In most cases, offerings will involve a primary element (ie, ‘new money’, with proceeds going to the issuer), often coupled with a secondary element (ie, proceeds going to the selling shareholders). IPOs which are purely secondary in nature are less common.
In almost all cases, a ‘greenshoe’ structure involving an over-allotment option over existing shares equal to 15% of the size of the base offering, alongside a stock-lend by an existing shareholder over an equivalent number of shares, will be put in place (to facilitate stabilisation). A ‘brownshoe’ structure involving an option over new shares is far less common.
Procedure and timeframe
What is the procedure and typical timeframe for launching an IPO?
The IPO process typically takes between four and six months from beginning preparations to the start of trading.
What due diligence is required and advised in the IPO process?
Documentary due diligence
A careful review of all material documents relating to issuer.
Management due diligence
Meetings and interviews held with issuer's management.
Financial due diligence
A review of accounts, financial performance, internal controls undertaken through meetings and interviews with issuer's auditors.
It is not market practice for a legal due diligence report to be prepared in the context of a main market listing, although such reports are usually required by the nomad in the context of an AIM admission.
Pricing and allocation
What rules and standards govern share pricing and allocation in the context of an IPO?
Under the EU Markets in Financial Instruments Directive II, the banks and underwriters in an IPO are required to keep records of:
- their “overarching allocation policy”;
- details of their initial discussions with issuers and the agreed proposed allocation per ‘type’ of investment client;
- the content and timing of allocation requests received from each investment client;
- justification for each allocation made, particularly in the case of oversubscription; and
- final allocations communicated to each individual investment client.
Types/pros and cons
What types of follow-on offering are commonly used in your jurisdiction, and what are the advantages and disadvantages of each?
Pro rata offer of new shares, for cash, made to existing shareholders by way of an issue of rights. Rights to subscribe for new shares are tradable.
Their advantages are that:
- they can often proceed without a shareholder vote (and with no limit on size and discount);
- they are made on a pre-emptive basis; and
- non-participating shareholders can receive compensation (and even passive shareholders can have their entitlement sold in the market).
Their disadvantages are that:
- a prospectus is required;
- the timetable is longer – especially if shareholder vote is required; and
- the cost is greater than other secondary offers.
Pro rata offer of new shares, for cash, made to existing shareholders by way of an issue of entitlements. Entitlements are not tradable.
Their advantages are that:
- they are made on a pre-emptive basis; and
- the open offer period may run concurrently with the notice period for any shareholder meeting required (meaning that the issuer receives the proceeds faster than in the case of a rights issue requiring a shareholder meeting).
Their disadvantages are that:
- a prospectus is required;
- they usually require a shareholder vote;
- there are limits on size and discount in the absence of shareholder approval (if there is more than 10% discount, shareholder approval is required under Listing Rule 9.5.10); and
- non-participating shareholders are diluted and receive no compensation.
Placing or accelerated bookbuild
The non-pre-emptive issue of new shares (or sale of treasury shares) for cash.
Its advantages are that:
- it is the quickest and lowest-cost option – it typically involves a launch announcement, very limited marketing (if any) and a bookbuild;
- there is usually no prospectus required, provided that it is less than 20% of issued share capital and the offer is made to institutions only; and
- it is less dilutive than an open offer.
Its disadvantages are that:
- it is a non-pre-emptive issuance; and
- there are limits on size and discount (if there is more than 10% discount, shareholder approval is required under Listing Rule 9.5.10).
Applicability and exemptions
When must a prospectus be filed? Are there any notable exemptions?
Under Section 85 of the Financial Services and Markets Act (FSMA), a prospectus is required if:
- there is an offer of transferable securities to the public in the United Kingdom; or
- there is a request for the admission of transferable securities to trading on a UK-regulated market.
The main exemptions to the prospectus requirement, found in Section 86 of FSMA, are if:
- the offer is made to or directed at qualified investors only;
- the offer is made to or directed at fewer than 150 persons (other than qualified investors) per European Economic Area (EEA) member state;
- the minimum consideration which may be paid by any person for transferable securities is at least €100,000;
- the transferable securities being offered are denominated in amounts of at least €100,000; or
- the total consideration for the transferable securities being offered in the EEA member states is less than €8 million.
Alternative Investment Market (AIM)
As AIM is not a regulated market, no prospectus is required to be drawn up or approved by the Financial Conduct Authority (FCA) – provided that there is no offer to the public. Instead, an AIM admission document will be published in accordance with the AIM Rules for Companies.
What must the prospectus contain?
The prospectus must include the information prescribed by the FCA’s Prospectus Rules, and as an over-arching requirement must also contain all of the information necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the issuer of the shares, and of the rights attaching to the shares. This includes disclosure of risk factors.
In addition, the prospectus should include audited historical financial information for the latest three financial years, as well as any quarterly or half-yearly financial information that the company has published since its last audited financial statements, together with all audit or review reports with respect thereto.
If there has been a significant change in the company’s position (eg, a significant acquisition or merger), it is necessary to include pro forma financial information to reflect the transaction as if it had occurred at the beginning of the period covered by the report. Any significant post-balance sheet change in the financial or trading position of the group must also be described.
Filing and approval procedure
What is the procedure for filing for and obtaining prospectus approval from the regulator? Can draft prospectuses be submitted to the regulator for preliminary comment?
Drafts of the prospectus should be submitted electronically to the FCA. The FCA will review a number of versions of the draft prospectus and provide detailed comments and raise points for clarification.
What types of prospectus liability can arise (eg, statutory, contractual, tort)? Which parties may be held liable?
Statutory liability under Section 90 of FSMA
The "persons responsible" for a prospectus are liable to pay compensation to any person who has acquired securities and suffered loss as a result of any untrue or misleading statement in the prospectus or the omission of any matter required to be included.
The categories of persons who are responsible include:
- the company;
- the directors; and
- each person who has authorised the contents of or accepts responsibility, either for the whole prospectus or any part of it (but in that case, only for that part).
In addition, a director may be liable for a negligent misstatement in (or omission from) the prospectus as a matter of common law. They may also be liable for fraudulent misrepresentation or deceit.
Market abuse under the Market Abuse Regulation (MAR)
If a statement in the prospectus would give, or is likely to give, false or misleading signals about the securities, the company and the directors could be liable under MAR. As a civil offence, market abuse requires a lower standard of proof than a criminal offence.
Contractual liability with investors
As the prospectus forms part of a contract between the company and investors, such investors may have a claim for damages against the company for breach of contract or rescission on the grounds of misrepresentation if any statement is untrue.
Contract with underwriter
The company and the directors may have liability to the underwriter in respect of loss arising from an inaccurate or incomplete prospectus or under any warranties and indemnities.
A person is liable under Section 1 of the Fraud Act 2006 if (among other things) they dishonestly make a false representation or dishonestly fail to disclose information which they are under a legal duty to disclose and, in either case, they intend thereby to make a gain for themselves or another or to cause loss to another.
If an officer of a company, with intent to deceive members or creditors of the company about its affairs, publishes or concurs in publishing a written statement or account (which could include a prospectus) which to their knowledge is or may be misleading, false or deceptive in a material particular, they shall on conviction be liable to imprisonment under Section 19 of the Theft Act 1968.
Under Sections 89 and 90 of the Financial Services Act 2012, any person (including the company and its directors, employees and advisers) could be subject to criminal proceedings for any false or misleading statement or for dishonestly concealing material facts or for conduct which creates a false or misleading impression as to the market for or value of the equity securities.
Under Section 398 of FSMA, it is an offence for a person to provide information which they know to be false or misleading, or to provide information recklessly which is false or misleading, in connection with an application for admission to the Official List or in purported compliance with any other requirement of FSMA.
Conspiracy to defraud is a common law offence which is established where two or more people agree to defraud another person of something to which they are, would be, or might be entitled. Deceiving a person into taking a risk in an investment which they would not otherwise have taken may constitute this offence.
Prosecution under any of the above criminal offences could also lead to disqualification from acting as a company director under the Company Directors Disqualification Act 1986 for up to 15 years.
What defences are available for liable parties?
Schedule 10 of FSMA provides exemptions from Section 90 liability:
- if the person responsible reasonably believed that the statement was true and not misleading;
- where the loss is caused by a statement purporting to be made by or on the authority of an expert, if the statement was included in the prospectus with the expert's consent and the person responsible believed that the expert was competent to make and authorise the statement;
- where the loss is caused by a statement made by an official person or contained in a public official document which is included in the prospectus, if it is proved that the statement was accurately and fairly reproduced;
- if, before the securities were acquired, a correction had been published in a manner calculated to bring it to the attention of potential investors; or
- if the person suffering the loss acquired the securities with knowledge that the statement was false or misleading, or with knowledge of the omitted matter.
What methods are commonly used to market equity security offerings in your jurisdiction?
On the basis of the prospectus, roadshow presentations from the management of the company (both to institutional and retail investors), press releases and – in the event of a retail offering to the public – advertisements and brochures.
Rules and restrictions
What rules and restrictions (if any) apply to the marketing of equity securities?
Financial promotion restriction
Section 21 of the Financial Services and Markets Act (FSMA) provides that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless that person is an authorised person or the content of the communication is approved by an authorised person. A financial promotion communication would include every type of marketing material.
It is a criminal offence for a person to contravene the financial promotion restriction. However, there are a number of principal exemptions, including communications made:
- only to shareholders of the company;
- in certain circumstances to employees of the company and related persons; and
- to, or directed at, various categories of sophisticated investors.
Misleading statements and practices
Under Sections 89 and 90 of the Financial Services Act 2012 and common law, any person could be subject to criminal or civil proceedings for:
- any false or misleading statements;
- dishonestly concealing material facts; or
- conduct which creates a false or misleading impression as to the market for or value of any securities, including the equity securities.
The civil prohibition on market abuse under the Market Abuse Regulation works in tandem with the criminal liability for misleading statements under Sections 89 and 90 of the Financial Services Act.
The giving of advice to potential investors on the merits of the securities may constitute a ‘regulated activity’ for the purposes of FSMA. If any person who is not authorised under FSMA gives such advice, a criminal offence may be committed under Section 19 of FSMA.
Offers to the public (Part VI of FSMA)
Under Section 85(1) of FSMA, it is unlawful for transferable securities to be offered to the public in the United Kingdom unless an approved prospectus has been made available to the public before the offer is made.
Advertisements under the Prospectus Rules
Advertisements (ie, announcements which aim to specifically promote the potential subscription or acquisition of securities) must not be issued unless they meet the requirements listed in Prospectus Rule 3.3.2.
To what extent is bookbuilding used in your jurisdiction, and how does the process customarily play out? What are the advantages and disadvantages of using this process?
Bookbuilding is the standard method by which equity offerings are priced and allocated in the United Kingdom. It is an interactive mechanism by which investors relay indications of demand and price sensitivity to the bookrunners, who then ‘lead’ investors towards appropriate valuation.
The advantages of the process include the fact that all of the initial investors in any initial public offering (IPO) or placing will have the opportunity to subscribe for, or purchase, the offered shares at the same price. The process is often perceived as contributing to market stability.
The disadvantages of the process include the fact that it is based, to an extent, on the bookrunners' subjective interpretations of the expressions of demand received from potential investors, and also that usually only a relatively small pool of investors (ie, those with whom the bookrunners have an existing client relationship) are canvassed. This exposes the process to the suggestion that it is an imperfect tool for price discovery.
Role of advisers
Adviser roles and responsibilities
Describe the role and responsibilities of the following advisers in the context of equity securities offerings, including how their relationship with the issuer is formalised (eg, through terms of agreements):
The investment banks are responsible for organising and implementing the initial public offering (IPO). They can assess the company's suitability for listing and assist with the preparation of the prospectus and due diligence. They will help in determining the price and underwrite the offering, and ought to bear the primary responsibility for liaising with regulatory and listing authorities (although lawyers’ support is often heavily relied on in this regard). They will coordinate the roadshow, assist in selling the shares and provide after-market support and advice. The underwriting agreement is the key agreement between the issuer, any selling shareholders and underwriters.
A company seeking a premium listing must appoint a sponsor (typically one of the underwriting banks) to:
- provide the Financial Conduct Authority (FCA) with confirmation of the company's eligibility;
- guide the company through the application process; and
- help the company to understand and meet its responsibilities under the Listing Rules, the Disclosure Requirements and the Transparency Rules.
Alternative Investment Market (AIM)-quoted companies must appoint a nominated adviser, also known as a ‘nomad’, in order to be eligible for AIM admission. A nominated adviser is responsible to the London Stock Exchange for assessing the appropriateness of an applicant for AIM, and for advising and guiding an AIM company on its responsibilities under the AIM Rules.
Auditors are appointed as ‘reporting accountants’ in the context of IPOs and provide assurance on the historical and any pro forma financial statements to be included in the prospectus or admission document. The reporting accountants also undertake financial due diligence (delivering a long-form due diligence report) and any analysis of the internal controls, and financial and operating systems of the issuer, as well as a working capital review. The reporting accountants will deliver a series of comfort letters to the issuer, the sponsor and the other investment banks in connection with this work.
The lawyers will play a coordinating role throughout the process, as well as advising on compliance with the relevant laws, rules and regulations. The lawyers – appointed by either the underwriters, selling shareholders or the issuer – lead the drafting of the prospectus and ensure that it complies with the rules (including disclosure obligations).
The lawyers typically shoulder most of the burden of responding to, or otherwise addressing, the comments made by the FCA in the context of its review of the prospectus and will provide the sponsor with advice (and comfort letters underpinning) its role in fulfilling its responsibilities to the FCA in its capacity as sponsor. The lawyers also lead:
- any necessary restructuring;
- legal due diligence;
- verification of the prospectus;
- investor presentations and analyst presentations; and
- the drafting of all documentation (including the underwriting agreement, stock lending agreement, any restructuring documents, board and committee minutes and various memoranda of advice).
They will also issue legal opinions to the investment banks.
(d) Any other relevant advisers?
Independent financial advisers may be appointed at the beginning of the IPO process to assist with the selection of other advisers and potentially advise on the business plan, financial modelling, investment case and business valuation.
The public relations adviser can assist during the marketing and roadshow by preparing marketing and presentation material and reaching out to the media.
What continuing obligations apply to issuers of equity securities? What are the penalties for non-compliance?
A company with a premium or standard listing will be subject to continuous disclosure requirements designed to prevent the creation of a false market in the company’s securities.
Inside information under Market Abuse Regulation
The company will usually be required to publicly disclose any inside information without delay. A company may delay the disclosure of inside information only in certain circumstances, including where the company is faced with an unexpected and significant event and a short delay is necessary to clarify the situation, or where the issuer considers that immediate disclosure of inside information is likely to prejudice the issuer’s legitimate interests (eg, when negotiations are ongoing).
An issuer may delay the disclosure only provided that to do so is not likely to mislead the public and the issuer is able to ensure the confidentiality of the information. Where an issuer delays the disclosure of inside information, it must inform the Financial Conduct Authority (FCA) that disclosure of the information was delayed immediately after the information is disclosed to the public. The FCA may request that the issuer provide a written explanation of how these conditions were met.
Listed companies and any person acting on their behalf or on their account must draw up a list of persons who have access to inside information.
Shareholding notification thresholds
A shareholder in a UK-incorporated company must notify the company (which in turn notifies the market) when its interest is in respect of 3% or more of the voting rights (and every 1% threshold thereafter) as soon as possible (and not later than two trading days) after learning of the relevant acquisition or disposal.
Requirements for persons discharging managerial responsibilities under MAR
Directors, other senior managers and persons closely associated with them – collectively known as ‘PDMRs’ – must notify the company (which in turn notifies the market) and the FCA of the occurrence of all transactions conducted on their own account relating to certain financial instruments, including shares in the company.
PDMRs must not conduct transactions on their own account (or on the account of a third party) during any closed period (30 calendar days before the announcement of the annual or interim financial results) or any period where there exists any matter which constitutes ‘inside information’ in relation to the company.
Total voting rights
The company must disclose the total number of voting rights attached to shares for each class admitted to trading at the end of every month in which there has been a change.
Companies with a premium listing are subject to the following additional obligations:
- A company must carry on an independent business as its main activity at all times;
- A company that has a controlling shareholder must have in place at all times a relationship agreement and comply with certain other ongoing obligations to ensure the independence of the issuer;
- Transactions with a related party must be notified to the FCA and, in some instances, notified to a regulatory information service and approved by shareholders; and
- A company must publicly disclose any change to the board as soon as possible.
Alternative Investment Market (AIM)
Under AIM Rule 11, an AIM company must announce without delay new developments which are not public knowledge and which, if made public, would be likely to lead to a significant movement in the price of its AIM securities (and must also comply with Article 17 of MAR).
An AIM company must publicly disclose:
- proposed substantial transactions;
- proposed related-party transactions;
- any transaction classified as a reverse takeover; and
- disposals resulting in a fundamental change of business.
An AIM company must also publicly disclose:
- details on certain types of transactions including:
- any changes passing through a percentage point, so far as is known to the company, to any person’s holding of 3% or more of the company’s shares; and
- directors’ and their family members’ holdings and dealings in the company’s shares;
- any material change between actual trading performance or financial condition and any public forecast, projection or estimate; and
- any change in the nomad or corporate broker.
Market abuse provisions
Rules and restrictions
What rules and restrictions are in place to combat market abuse and insider trading? What are the penalties for breach of these rules?
Under the Criminal Justice Act 1993, it is a criminal offence for an individual who has inside information – and has that information as an insider – to deal in securities on the London Stock Exchange, or through a professional intermediary. The penalty is an unlimited fine or imprisonment for a maximum of seven years. There are a number of defences, normally restrictively interpreted, and the burden of proof falls on the defendant.
The civil prohibition on market abuse is contained in MAR and works in tandem with the criminal sanctions against insider dealing and market manipulation. Broadly speaking, market abuse under MAR consists of insider dealing, unlawful disclosure of inside information and market manipulation. The FCA has published a set of provisions – MAR 1 – which give guidance to assist in establishing what type of conduct would be permitted and prohibited as market abuse for the purposes of MAR.
The FCA can:
- unlimited fines;
- public censure;
- a temporary or permanent prohibition on an individual holding certain positions in an investment firm; or
- a temporary prohibition on an individual acquiring or disposing of financial instruments;
- require a company to publish specified information or a specified statement in certain circumstances; and
- institute proceedings for direct engagement in market abuse.
What tax liabilities arise in relation to the issue and trade of equity securities in your jurisdiction?
Taxation of chargeable gains
A disposal of UK shares by a corporate shareholder which is resident in the United Kingdom may give rise to a chargeable gain or an allowable loss for the purposes of corporation tax.
A corporate shareholder that is not resident in the United Kingdom will generally not be liable for corporation tax on chargeable gains accruing on the disposal of its shares unless it carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom.
No stamp duty or stamp duty reserve tax (SDRT) will generally be payable on the allotment and issue of shares in a UK company.
An instrument used to transfer UK shares will generally be liable to stamp duty at 0.5% (rounded up to the nearest multiple of £5) of the chargeable consideration (which includes cash, shares and certain other types of consideration) paid.
Transfers of shares within CREST are liable to SDRT (at 0.5% of the amount or value of the consideration payable) rather than stamp duty, and SDRT on relevant transactions settled within the system or reported through it for regulatory purposes will be collected by CREST.
There should be no stamp duty or SDRT charged on transactions in shares that are admitted to trading on the London Stock Exchange's Alternative Investment Market.
Stamp duty and SDRT are normally paid by the purchaser.
The United Kingdom applies no domestic withholding tax to the payment of dividends by a UK company, regardless of the residence of the shareholders holding the shares in respect of which the dividend is paid.
A corporate shareholder not resident in the United Kingdom will not be subject to corporation tax on dividends received from the company, unless it carries on a trade in the United Kingdom through a permanent establishment. Unless an exemption is available (which will often be the case), a corporate shareholder resident in the United Kingdom will be subject to corporation tax on dividends received from a company.
How can these tax liabilities be mitigated?
Taxation of chargeable gains
UK corporate shareholders disposing of shares may benefit from a limited indexation allowance (which will provide relief for the effects of inflation by reference to movements in the UK retail price index up to December 2017) and the United Kingdom's substantial shareholding exemption (which is an exemption from corporation tax on gains realised on the disposal of certain substantial shareholdings).
Special rules and exemptions are available which grant relief from stamp duty or SDRT for market makers, brokers, dealers and intermediaries dealing in UK shares (where certain conditions are met) and in relation to certain transactions involving depositary receipt systems and clearance services (where certain conditions are met).
Generally, unless the payment of a dividend is caught by anti-avoidance rules (eg, where a tax deduction is taken by a non-UK resident in respect of the dividend), the receipt of a dividend by a UK company should be exempt from UK corporation tax. The exact requirements that must be met for the dividend to be exempt from UK corporation tax will depend on whether the recipient is a small company or a larger company.